Graham Corporation Reports 58.7% Growth in Net Income in the First Quarter of Fiscal Year 2007; Net Income Increased 58.7% on 24.3% Increase in Sales; Backlog Grows 16.8% to $38.6 Million from 2006 Fiscal Year End

Business Wire, July 27, 2006

BATAVIA, N.Y. -- Graham Corporation (AMEX: GHM) today reported net income of $1.1 million for its first quarter of fiscal 2007 ended June 30, 2006, up $0.4 million, or 58.7%, from net income of $0.7 million in the first quarter of the prior fiscal year. On a diluted per share basis, net income was $0.28, up $0.08, or 40%, over net income of $0.20 in the prior year period.

Continued strong worldwide demand for Graham's products for use in oil refineries and petrochemical plants has driven sales growth. Net sales for the first quarter were $14.6 million, up $2.9 million, or 24%, compared with the first quarter of the prior year. Graham believes that its higher international sales reflect global growth in refining and petrochemical capacity. International sales in the first quarter of fiscal 2007 were $8.6 million compared with $6.2 million in the first quarter of fiscal 2006. Shipments in the first quarter were 27% to the refining industry, 50% to the chemical/petrochemical industry, 5% to the power industry and 18% to other industrial applications.

Mr. James R. Lines, Graham's President and Chief Operating Officer, commented, "We have a very solid start for fiscal 2007 after completing a record year for our operations in fiscal 2006. We continue to see strong demand for our products and services as both existing and new customers continue to pursue higher quality vacuum systems that both address intense operating environments and reduce operating risk. Our objective is to grow our capacity without overburdening our fixed cost structure by selectively outsourcing certain non-core engineering activities and by using contract employees. We believe that these efforts, combined with continuing process improvements and development of our engineering staff, will help us in our effort to obtain our previously announced 2007 revenue target of $75 to $80 million."

Costs and expenses

Gross margin for the first quarter of fiscal 2007 was 28.2%, remaining relatively level with the prior fiscal year's first quarter gross margin of 28.4%, while operating margin improved 230 basis points to 11.5% compared with the first quarter of fiscal 2006 as operating leverage was realized. Mr. Lines noted, "We have effectively managed the rising costs in materials through our proposal and procurement processes, but we anticipate that gross margin will face future pressure from material, energy, labor and benefit costs, as well as likely lower margin sales in Asian markets because of their specific economic climates."

SG&A for the first quarter was $2.4 million, an 8.3% increase over the same period last year. Higher SG&A reflects increased employment costs primarily for overtime and contract employees. Total employees, including contract employees, at the end of the first quarter of fiscal 2007 were 288 compared with 255 at the end of the prior year's first quarter. As a percentage of sales, SG&A was 16.7% in the first quarter of 2007 compared with 19.2% in the prior year's first quarter.

Other income of $148 thousand was royalty income earned under an October 2005 license agreement related to a nuclear power plant.

Balance Sheet and Cash Management

Receivables increased 61% from March 31, 2006, primarily as a result of the timing of the receipt of progress payments. Inventory declined 37% from such date, primarily as a result of the invoiced progress payments.

Cash used by operating activities was $2.5 million, reflecting higher working capital requirements related to the geographic expansion of Graham's customer base.

During the quarter, Graham increased its credit facility by $7 million to $20 million. The facility is primarily used by Graham for letters of credit and working capital requirements. At June 30, 2006, Graham had no borrowings under this facility and $6.4 million in standby letters of credit outstanding.

Capital expenditures for the quarter were $204 thousand compared with $81 thousand in the first quarter last year. Graham anticipates capital spending in fiscal 2007 to be between $1.0 to $1.5 million.

Outlook

Orders for the quarter were $20.0 million, down slightly from $20.4 million in last year's first quarter, but up $1.4 million from bookings of $18.6 million in the quarter ended March 31, 2006. Backlog grew during the quarter to $38.6 million, up from $31.1 million and $33.1 million at the end of fiscal 2006's first and fourth quarters, respectively.

When current backlog is compared with sales to the refinery and chemical petrochemical industries during the first quarter, it has a higher percentage of refinery orders (46%) and a lower percentage of chemical/petrochemical industry orders (33%). Current backlog has 6% in orders for the power industry which is relatively the same as the percentage of sales to that industry in the first quarter. The remainder of the orders in backlog are for other industrial applications. Orders in backlog are expected to ship within twelve months.

Mr. Lines added, "Our team in China has successfully negotiated and won approximately $10 million in orders to date. We believe such orders would not have been possible without our sales, engineering and project management operation in Suzhou. Given the market potential we believe exists in Asia, we could substantially increase our revenue over time. We anticipate receiving orders during the second quarter from both our China and U.S. based sales operations that will contribute to our revenue goal for the year," he concluded.